While the generic overnight futures meltup is present this morning, it is nothing compared to what the epic surge in the EURJPY early in the overnight session suggested it would be, and in fact the levitation in US equities driven as usual by Yen carry trades (just what is the P/E or PEG on the USDJPY, or the EURUSD for that matter?) is far more muted than seen in recent days. The main reason for the easing of the carry-risk signal pair is the increasing confusion over what may happen next week when increasingly more are convinced Bernanke will announce a Taper, and since everyone remembers the summer very vividly, the last thing anyone wants is to be the last Kool-aid drinker at the centrally-planned party.

After a week of losses Asian markets were mixed overnight with the Nikkei outperforming on the back of USDJPY weakness, up +1%, whilst the Hang Sang is up +0.1%, however the Shanghai composite is down 0.31% as we type. This action comes as the US House passed its first bipartisan budget deal in four years yesterday, with the vote being won 332-94 today as 169 Republicans and 163 Democrats voting for the voting for the deal. Also overnight AUDUSD hit a three and a half month low after RBA governor Stevens said that fair value for the currency is 0.85 to the dollar.

Meanwhile in Europe, better trading stocks failed to weigh on Bunds this morning, which remained bid as market participants digested yet another uptick in the 3-month Euribor rate fix. Nevertheless, concerns over liquidity squeeze were somewhat offset by another rise in excess liquidity in the Euro-system, which rose to EUR 162.37bln from EUR 160.785bln and also a drop in EONIA fix to 0.139% from 0.144%, which was the first decline in 9 trading days. Consequent flattening of the Euribor curve, together with upside bets in Sep-14 Euribor with a strike of 100.00 were led by fears of potential negative deposit rates being implemented. Bear steepening of the Euribor curve resumed after the ECB said that banks to repay EUR 3.32bln from 1st 3y LTRO and EUR 19.33bln from 2nd 3y LTRO, which analysts attributed to reduction in bond holding pre-AQR next year and also potential implementation of negative deposit rates by the ECB. This, together with technical selling, saw EUR/USD and GBP/USD move back into negative territory.

On the US calendar today there is just one data point, the PPI release expected at 8:30am, and which consensus sees as rising 0.1%. Perhaps more important, at 11:00am the Fed's POMO is set to purchase just $1.25b-$1.75b in the 2036-2043 sector.

Market Re-Cap from RanSquawk

Better trading stocks failed to weigh on Bunds this morning, which remained bid as market participants digested yet another uptick in the 3-month Euribor rate fix. Nevertheless, concerns over liquidity squeeze were somewhat offset by another rise in excess liquidity in the Euro-system, which rose to EUR 162.37bln from EUR 160.785bln and also a drop in EONIA fix to 0.139% from 0.144%, which was the first decline in 9 trading days. Consequent flattening of the Euribor curve, together with upside bets in Sep-14 Euribor with a strike of 100.00 were led by fears of potential negative deposit rates being implemented. Bear steepening of the Euribor curve resumed after the ECB said that banks to repay EUR 3.32bln from 1st 3y LTRO and EUR 19.33bln from 2nd 3y LTRO, which analysts attributed to reduction in bond holding pre-AQR next year and also potential implementation of negative deposit rates by the ECB. This, together with technical selling, saw EUR/USD and GBP/USD move back into negative territory. Looking elsewhere, FTSE-100 index underperformed its peers throughout the session, with RSA Insurance down close to 20% after company announced acceptance of chief executive's resignation after the company issued its third profit warning in six weeks and admitted its dividend was in question. Also, Peugeot Citroen shares fell around 10% after General Motors announced plans to sell its entire Peugeot stake. Looking ahead for the session there is a relatively light economic calendar with the most significant event being the release of US PPI at 1330GMT/0730CST.

Overnight news bulletin from Bloomberg and RanSquawk

Bear steepening of the Euribor curve resumed after the ECB said that banks to repay EUR 3.32bln from 1st 3y LTRO and EUR 19.33bln from 2nd 3y LTRO, which analysts attributed to potential reduction in bond holding pre-AQR next year and also potential implementation of negative deposit rates by the ECB.

US House passes budget measure by 332-94 votes which would ease USD 63bln in US spending cuts, with the USD 1.01trl budget now awaiting a senate vote.

Japan's GPIF is to buy inflation-linked JGBs from April. According to reports, GPIF is to buy more than JPY 400bln in inflation-linked JGBs vs. total issuance amount of JPY 1.2trl in the next fiscal year.

Treasuries head for weekly loss after 3Y/10Y/30Y auctions and as data including stronger-than- expected Nov. retail sales suggested a higher probability of Fed taper at next week’s FOMC.

JPY fell to a five-year low vs USD as the yield difference between Treasuries and JGBs approached the widest since April 2011 amid investors speculation on the timing of a cut in U.S. stimulus

The House passed the first bipartisan U.S. budget in four years yesterday, clearing the way for final Senate passage next week to ease $63b in spending cuts and avert another government shutdown

Health insurers are being asked by the U.S. government to be lenient with Obamacare customers who miss the Dec. 23 deadline for enrolling in the program or are late with their initial payment

German Social Democratic leaders expressed confidence that the party’s rank and file will agree to governing with Merkel, saying there’s no reason to expect SPD members will reject an alliance with her bloc

Japan's GPIF is to buy inflation-linked JGBs from April. According to reports, GPIF is to buy more than JPY 400bln in inflation-linked JGBs vs. total issuance amount of JPY 1.2trl in the next fiscal year.

BoJ's Kuroda says Japan intends to achieve the 2% inflation target and maintain it in a stable manner. On that note, analysts at Morgan Stanley MUFG expect more BoJ easing in July.

EU & UK Headlines

ECB says banks to repay EUR 3.32bln from 1st 3y LTRO and EUR 19.33bln from 2nd 3y LTRO. Bear steepening of the Euribor curve resumed following the release, which analysts attributed to reduction in bond holding pre-AQR next year and also potential implementation of negative deposit rates by the ECB.

Ratings on Italy affirmed by S&P at BBB/A-2, outlook remains negative. Analysts at S&P also affirmed ratings on Luxembourg at 'AAA/A-1+'; outlook stable.

Fitch head of sovereign ratings said will take time for Britain to earn back AAA rating as needs sustainable fall in debt-to-GDP.

SPD officials say they are more open to the kind of 'solidarity' with troubled EU economies frequently asked for by Brussels. That, they say, will mean a different kind of Germany at the EU's negotiating tables.

- The ONS said that construction revisions add 0.1% to Q1, Q3 GDP growth and that UK home building grows by 18.6% Y/Y in October, the biggest rise since January 2011.

US Headlines

US House passes budget measure by 332-94 votes which would ease USD 63bln in US spending cuts, with the USD 1.01trl budget now awaiting a senate vote.

Following this, analysts at S&P and Moody's said that the budget deal is encouraging for US credit rating. Specifically, S&P noted that smooth budget talks positive for US creditworthiness' if continue and Moody's stated that budget deal reduces possibility of disruptions.

Equities

Better trading stocks failed to weigh on Bunds this morning, which remained bid as market participants digested yet another uptick in the 3-month Euribor rate fix. FTSE-100 index under performed its peers throughout the session, with RSA Insurance down close to 20% after company announced acceptance of chief executive's resignation after the company issued its third profit warning in six weeks and admitted its dividend was in question. Also, Peugeot Citroen shares fell around 10% after General Motors announced plans to sell its entire Peugeot stake.

FX

In European trade EUR/USD took a move to the downside after breaking the overnight lows around 1.3740 as concerns over negative rates continue to weighs on prices. Furthermore, there has been a trade go through in Euribor options (Sep-14 100.00 calls, buyer of 30k at 1) suggesting that there is a bet on negative rates in the Euro-zone, a topic that has been on the agenda for some weeks now. In combination with this move the USD index is trading in line with overnight highs after breaking above its 50DMA at 80.36 to trade at intra-day highs of 80.37. Consequently, GBP/ USD has also come under some selling pressure, now testing bids at the 1.6300 level.

Analysts at Santander see EUR/USD at 1.4000 in Q4 2014 vs previous forecast of 1.3800 and also see GBP/USD at 1.7000 in Q4 2014 vs previous forecast of 1.6400.

BofAML say that now is the time to turn bullish on EUR/GBP with potential for a 5% gain.

Commodities

Goldman Sachs says 2014 will be another tough year in metals and mining.

Brazil’s exports of copper ore and cathodes rose in November as more material was sent to Asia and Europe, according to figures from the country’s trade ministry.

Iranian negotiators halted nuclear talks with major powers to return to Tehran for consultations after Washington blacklisted a dozen companies and individuals for evading US sanctions, state media reported.

Other press reports indicated that the EU says that further work is needed on Iran, P5+1 nuclear deal implementation.

* * *

DB's Jim Reid concludes the overnight summary

As markets currently take a small but nervy backward step due to fears of the Fed removing some of its bond buying next week, it is worth reminding ourselves that on Monday it will be exactly 5 years since the Fed made the historic move to drive interest rates to zero (well, 0-0.25%) where they have remained ever since. In the same announcement the Fed reaffirmed its commitment to purchase large quantities of agency debt and mortgage-backed securities, a policy that after numerous changes also continues to this day. It’s fair to say that the Fed have created a marvellous environment for virtually all assets even if this remains one of the weakest economic recoveries on record in the US and through virtually all of the DM world. Only Greek equities (-24%) in our sample have seen negative returns. The standout asset class over the past 5 years has been high-yield corporate bonds, with total returns in Europe of 151% and in the US of 142%. We did a back of the envelope calculation to work out where European HY yields would have to go to see returns of 150% over the next 5 years. The answer was around -47% – although we’d warn you that the calculation did break our computer and it is very dependent on the path of yields. Anyway, it’s not going to happen so no need to get bogged down in the calculations. DM and EM equity has also performed strongly with the US leading the way. The S&P 500 has returned 120% compared to the MSCI EM return of 103% (albeit increasingly under-performing DM over the last couple of years). European equities have lagged (but are catching back up) given the sovereign crisis. Core markets have still seen strong returns though with the FTSE and the DAX both up more than 90% whilst most peripheral markets have still seen positive returns with Spain’s IBEX (+37%) and Italy’s MIB (+12%) higher. Nevertheless the peripherals have under-performed with Greek equities still negative as discussed at the top. Commodities have also performed well over the 5-year period but with most of the returns front-loaded in the first half of the period. Overall copper (+145%) is leading the way with gold something of a middling performer up +47% after a fairly sharp decline from the peak.

Within the DM fixed income universe, HY has been followed (in order of performance) by Fin Sub Debt (around +70%), IG and Fin Sen Corporate Debt (+50%) and finally government bonds (Gilts +34%, Bunds +23% and Treasuries +12%). When you see the scale of returns seen in these assets it’s hard to imagine that withdrawing QE or ZIRP will be particularly easy for assets.

We’ve been getting a very small taste of this over the last few days as markets are adjusting to the possibility that the Fed might start to withdraw liquidity as soon as next week. After a week of losses Asian markets were mixed overnight with the Nikkei outperforming on the back of USDJPY weakness, up +1%, whilst the Hang Sang is up +0.1%, however the Shanghai composite is down 0.31% as we type. This action comes as the US House passed its first bipartisan budget deal in four years yesterday, with the vote being won 332-94 today as 169 Republicans and 163 Democrats voting for the voting for the deal. Also overnight AUDUSD hit a three and a half month low after RBA governor Stevens said that fair value for the currency is 0.85 to the dollar. The mixed tone in overnight Asian markets came after a third straight day of losses on Thursday which saw Equity markets across the board down; with the S&P down -0.38%, FTSE down -0.96%, the DAX down -0.66% and the IBEX down 0.93%. In government bond markets US 10Y rates rose almost 3bps to 2.87% whilst European Main and Xover were 2 and 5 bps wider respectively.

The trigger for these moves appeared to be the above consensus advanced retail sales figure which came out at +0.7% MoM vs +0.6% consensus which added to concerns the Fed may begin to taper after its 17-18 December next week. Listening to DB Chief Economist Peter Hooper yesterday on the World Outlook call he argued that this data point taken alongside the recent run of stronger data in the US certainly increases the chances the Fed may taper at the December meeting. He argued that three of four criteria for the Fed to start tapering now look to be met: (1) a significant improvement in the labour market (met), (2) confidence that the economic recovery is self sustaining (very close, especially with recent data), (3) inflation on target (not met yet as inflation remains on a worryingly low trend) and (4) the removal of fiscal uncertainty (the deal over the past week has lessened concerns significantly). As Peter notes, the only criteria he sees not having been met is on inflation. This puts some importance on the US PPI numbers today with consensus expecting them to be flat MoM after falling 0.2% at the previous release. More important will be next Tuesday’s CPI numbers which come out on the day the FOMC meeting begins. Peter doesn’t think the Fed have made their final decision yet so maybe the inflation data will contribute towards it.

In other news yesterday the Spanish government promised to block a Catalan independence vote which the Catalan President had announced just minutes earlier to be held on November 9th next year. Spain’s struggles in recent years have increased support for independence in Catalonia, which is one of the country’s most developed regions, accounting for about a fifth of Spain’s economic output. Opinion polls suggest that Catalans are roughly evenly split on the question of independence.

As we’ve already flagged the key event data release today will be US PPI, which comes out at 13.30 GMT.